What you learned in kindergarten about sharing could help in your quest for a home. But this time around, rather than sharing your Lincoln Logs, you'll be sharing your home, with a cobuyer.
Once the domain of married or committed couples, more and more homebuyers are discovering the advantages of teaming up with a relative, friend, or someone else to buy a house. If done right, the shared-purchase approach can get you a home you might not otherwise have been able to afford.
On the other hand, if you don't fully think through the arrangement and set it up correctly, it could lead to financial and legal chaos, not to mention a damaged or broken relationship.
Decide How You'll Hold Title
Any time you buy a house, you receive what's called "title," evidenced by a piece of paper called a "deed," which explains how the co-owners (called "grantees") are sharing the title. Although this sounds legalistic, your decision could have very real-world ramifications down the road, especially when it comes time to part ways with your co-owner.
Your main options for sharing title with a non-spouse include:
- as tenants in common (TIC), and
- as joint tenants with right of survivorship (JTWROS).
(Married couples may also take title as "tenants by the entirety" or as "community property.")
Differences Between TIC and JTWROS Ownership
There are some important differences between a tenancy in common and joint tenancy, particularly when it comes time to sell or dispose of one person's ownership interest.
With a TIC, there's no need for a 50/50 split: You and your cobuyer are allowed to own unequal interests (also called shares) in the property. Also, if one co-owner dies, that co-owner's share is transferred to the beneficiaries of his or her estate (probably a spouse or children). Tenancy in common (TIC) is by far the most common way for unrelated cobuyers to take title.
With a JTWROS, by contrast, you and your cobuyer have (in almost all U.S. states) no choice but to own equal interests in the property, 50/50. If you buy a home with two others, you each own a one-third interest, and so forth. Upon the death of one joint tenant, the remaining owners gain the deceased owner's interest in the property. This happens automatically, with no need for a court or probate proceeding. In fact, even if the deceased owner wrote a will specifying that the property was to pass to some other person, that request would usually be refused.
Similarities Between TIC and JTWROS Ownership
Both tenancy in common and joint tenancy give each of you an "undivided interest" in the property, meaning you can both use and enjoy the entire property -- no need to draw a line down the middle. If one of you wanted to sell, that person couldn't simply divide the property in half and sell it, but would instead have to sell his or her tenancy or interest in the property. The buyer would gain the same rights as the seller had (to use and enjoy the entire property). And if you're buying a second home or investment property, you'd both be entitled to rental income from the entire property in proportion to your ownership share.
Create a Co-Ownership Agreement
Talk is cheap, and what's worse, easily forgotten later. That's why you need to draft and sign a co-ownership agreement, to help head off confusion or misinterpretation down the road.
The most challenging part of drafting a co-ownership agreement is anticipating issues while everything looks rosy. Most people enter into a partnership with the friendliest of intentions, thinking they can work out any unforeseen questions later. But with big dollars and possibly your leisure or retirement time at stake, fundamental disagreements can arise and can be tough to work out.
Co-ownership agreements can range from short to lengthy. The agreement should at least address the issues discussed below.
Who Owns What Percentage?
Clarifying what percentage each of you will own is especially important in case one of you later dies or decides to sell your interest.
This decision is easy if you take title as joint tenants with right of survivorship (JTWROS). You'd normally divide your interest into equal parts, such as 50/50 if there are two of you.
If you take title as tenants in common (TIC), however, you don't need to divide your interests 50/50, nor even on the basis of how much money each of you puts in. For example, the two of you might decide that one will receive a greater percentage based on having agreed to manage upkeep on the property or contributed more for the down payment.
Who Will Pay Ongoing Expenses?
Your ongoing homeownership expenses may include mortgage payments, property taxes, insurance premiums, repairs, utilities, and other costs of maintaining and operating your home. You can specify how you'll allocate these expenses in your co-ownership agreement. You can simply allocate costs at the same percentage as ownership or use the down payment contribution of each co-owner as the foundation. Or, if you and your co-owner plan use the place personally (as opposed to renting it out), then you could allocate expenses based on the amount of time each of you spends there.
What If One Co-Owner Later Wants Out?
When you co-own a house, getting out of the deal may not be so simple. Neither of you probably wants the other one to be able to sell his or her interest to any old third party (assuming there's even a market for a partial interest in a house). But that's exactly what can happen, because regardless of whether title is held as a TIC or JTWROS, a co-owner does not legally need the other's approval to sell an interest in the property.
One way around this is to have a provision in the co-ownership agreement that requires a selling co-owner to give the person who's staying a right of first refusal to purchase the interest. However, even with this provision, there are still several questions the co-ownership agreement will need to address:
- How will you fairly assess the property's value for the buyout?
- Does the selling co-owner have to accept the buyout offer?
- What if the remaining co-owner can't come up with sufficient funds to buy out the selling co-owner?
Sharing the purchase of a home can significantly reduce your debt burden. But you should thoughtfully and carefully decide whether it makes sense for you and your potential cobuyer.
Detailed information on buying a house with a nonspouse can be found in Living Together, by Ralph Warner, Toni Ihara and Frederick Hertz (Nolo).